Pentagon Rips TransDigm for ‘Gouging’ Taxpayers With $4,361 Metal Pin

TransDigm Group Inc. is “gouging our taxpayers” with spare
parts markups that were as high as 4,451% from 2015 through
2017 as it repeatedly declined to provide backup data on costs,
according to a Pentagon official.

“Once TransDigm refused to provide the requested cost data” for
at least 15 parts during those years, “our contracting officers
were left with the limited options” of either buying the parts
without receiving the information or “not buying the parts
needed to meet mission requirements,” Kevin Fahey, assistant
defense secretary for acquisition, said in a statement prepared
for delivery Wednesday to a House committee.

“Is what TransDigm is doing illegal? No,” Fahey said. “Do I
consider gouging our taxpayers for excessive costs immoral and
unconscionable in the face of getting our warfighters what they
need to fight? Yes.”

Fahey commented as Representative Elijah Cummings, chairman of
the House Committee on Oversight and Reform, released a memo
and convened the hearing on the parts charges and whether the
Defense Department needs new authority to press contractors on
their cost and profit calculations.

The Pentagon faces potentially even greater markups, including
more than 9,400% for a half-inch metal pin that could cost the
government $4,361, under a new contract signed in July 2018
with TransDigm,

TransDigm fell as much as 4.7 % on Wednesday, the biggest
intraday decline since Dec. 27.

Fahey, who reports to Ellen Lord, the Pentagon’s acquisitions
chief, set out steps the Defense Department is taking after a
February report by the department’s inspector general that
outlined a pattern of TransDigm refusing to provide cost data
for parts and asserted that excessive markups were routine.

TransDigm’s Response

TransDigm’s Chief Executive Officer Kevin Stein in his prepared
statement to the committee that the Pentagon’s inspector
general “did not audit or (to use the colloquial term)
‘investigate’ TransDigm.”

“Rather, it audited the procurement practices of the Defense
Logistics Agency and other government buying agencies” and “in
doing so, the IG found that TransDigm did nothing in
contravention of the federal acquisition laws and regulations
with respect to its pricing.”

Stein said Cleveland-based TransDigm is primarily a commercial
supplier, “not a traditional defense contractor.” Federal
acquisition regulations require that contracting officers buy
products and services at “fair and reasonable” prices. “But, as
a general proposition, the fairness and reasonableness of
prices that the DoD pays for commercial items is determined by
market prices generated in the commercial marketplace,” he
said.

Steps being taken by the Pentagon, according to Fahey, include
setting up an intra-department system to share the names of
companies refusing to provide data and reviewing existing
regulations and legislation for potential changes to strengthen
tools to gather data.

Fahey said in his statement that TransDigm is a “bad actor”
that “has built its long-term business strategy on buying
exclusive licenses or entire companies that manufacture
military-unique, high demand, low value parts for DoD weapons
systems and then drastically increasing the price of those
parts.”

TransDigm has acquired more than $1 billion in sales from
sole-source after-market parts suppliers in recent years and
now has more than 101 subsidiaries that have allowed it to own
or exclusively license more than 2,500 spare parts for military
aircraft, Fahey said.

From Oct. 1, 2014 through April 11, 2019, the Pentagon executed
4,697 contract actions with TransDigm and its subsidiaries
valued at $634.7 million. Of those contracts, 28% were
sole-source transactions totaling $273 million, figures that
“are extremely bothersome,” Fahey said.

The inspector general’s report in February generated a flurry
of congressional interest. with officials from the Pentagon and
the Defense Logistics Agency providing briefings to Cummings’s
staff, those of the House Armed Services Committee and Senator
Charles Grassley. Information included detailed breakdowns of
TransDigm contracts and pictures of spare parts with allegedly
excessive profits.

The underlying debate is over laws and acquisition regulations
that hamstring Pentagon contracting officers from demanding
back-up data on parts contracts. Legislation from the Federal
Acquisition Streamlining Act of 1994 to recent defense policy
bills sought to encourage commercial contractors to conduct
business with the military by freeing them from providing
information that could be competitively sensitive and onerous
to collect, according to the inspector general’s report.

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